Question

Use the following information to answer the next two questions: On January 1, 2018, Jimbo Enterprises purchased new equipment for its training center. The equipment cost $220,000. Jimbo paid $25,000 down and is required to pay the rest in semiannual installments for the next 8 years. Jimbo's cost of borrowing is 4%.

(a) What is the amount of the semiannual payment Jimbo will make every six months?

(b) What is the total amount of interest expense Jimbo will pay over the life of the loan?

Answer 1

principal = price-down = 220000-25000=195000

	Semi Annual rate(M)=	yearly rate/12=	2.00%	a. Semi Annual payment=	14361.77
Half year	Beginning balance (A)	Semi Annual payment	Interest = M*A	Principal paid	Ending balance
1	195000.00	14361.77	3900.00	10461.77	184538.23
2	184538.23	14361.77	3690.76	10671.01	173867.22
3	173867.22	14361.77	3477.34	10884.43	162982.79
4	162982.79	14361.77	3259.66	11102.12	151880.67
5	151880.67	14361.77	3037.61	11324.16	140556.51
6	140556.51	14361.77	2811.13	11550.64	129005.86
7	129005.86	14361.77	2580.12	11781.66	117224.20
8	117224.20	14361.77	2344.48	12017.29	105206.91
9	105206.91	14361.77	2104.14	12257.64	92949.28
10	92949.28	14361.77	1858.99	12502.79	80446.49
11	80446.49	14361.77	1608.93	12752.84	67693.64
12	67693.64	14361.77	1353.87	13007.90	54685.74
13	54685.74	14361.77	1093.71	13268.06	41417.68
14	41417.68	14361.77	828.35	13533.42	27884.26
15	27884.26	14361.77	557.69	13804.09	14080.17
16	14080.17	14361.77	281.60	14080.17	0.00

Where

Interest paid = Beginning balance * Semi Annual interest rate

Principal = Semi Annual payment – interest paid

Ending balance = beginning balance – principal paid

Beginning balance = previous Half year ending balance

total payment=Semi Annual payment*number of Half year

=14361.7745*16

=229788.392

b . Total interest paid= total payment-period 1 beginning balance

=229788.392-195000

=34788.40